JP Morgan Pours More Cold Water On Stress Test Credibility, Sees Anything Less Than 25% Haircut On Greek Bonds As A Joke

Just as Europe was happily gloating that it managed to push markets up with the second stress test rumor of a Greek debt haircut of 16-17%, here comes JPM's Francesca Tondi dashing European bank regulators' hope, and stating that anything below 30% on Greek bonds, 20% on Portugal, 15% on Spain, and 10% on Italy, Ireland and Hungary (in the base case scenario), is a joke. Below is the sensitivity table that serves as the framework for JPM's stress test. As can be seen, even the optimistic scenario is far more draconian than what Europe is planning on using, thereby discrediting the test, whose assumptions are now likely going to be revised yet again to be seen as anything remotely credible.

Below are JPM's haircut levels on debt by country:

Here is JPM's stress test summary:

With heightened debate over a stress test exercise in Europe, which regulators could publish by the end of the month, for illustrative purposes, we model a stress scenario for our universe of 36 listed European commercial banks, which include a stress test of higher credit losses consistent with a recession scenario, as well as an additional charge for "haircuts" on the banks’ sovereign bond holdings. Our analysis does not include the unlisted banking sector.

Ultimately, the scope of the exercise, which at the European level is "orchestrated" by CEBS, is for regulators (but also market participants when published) to obtain reassurance that banks have sufficient capital buffers to withstand a stress; such a minimal “watermark” capital level has not been publicly defined but we assume that it is a core Equity Tier 1 ratio of 6%. In our view, the methodology used will be as relevant as the actual conclusions. Based on our illustrative scenarios, we draw the following conclusions:

1) -Modeling a macro recession over the next 18 months, would increase LLP and erode earnings, but would not “tip the sector over the edge” as 25 banks out of 36 would pass the test. Our universe would “only” require €30bln of additional capital (Core ratio from 8.8% to 7.3%); concentrated in “only” 11 banks (largely based in Germany, Ireland, Greece), which however, in our view, have a capital shortfall of c. €15-20bln even before a stress test.

2) -We also flag that even under a recession scenario 10 European banks not only do not need further capital, but also still report a profit: among the large banks, these include SAN, Stan Chart, BBVA, DBNor, HSBC, BNP, Nordea and ISP.

3) -We add to our analysis also some scenarios of "haircuts" on the banks’ sovereign bond holdings, which market participants haverequested for some time, although regulators are still debating whether to include in the actual stress test. Having applied a haircut (of 6% on avg, with ranges from 5% to 30%) to the banks’ sovereign bond portfolio, our modelling indicates that our universe of banks may need an additional €24bln of capital, bringing the total potential capital need to €54bln, spread over 21 banks. Note that to date, European banks have already received, and still can use as a buffer, €35bln in the form of government support, which at least goes some way towards providing a cushion, should the stress materialise.

4) -Putting a “stress capital need” into context highlights that the market has already largely discounted a stress scenario - Ultimately, even the €57bln capital requirement in our more comprehensive scenarios (of macro recession and sovereign haircut), represents c. 8% of our universe market cap, vs the c. 16% value "destruction" suffered by our universe in the last 3 months (admittedly partly due to liquidity issues). Trading on P/NAV of 1.0-1.5x even after NAV erosion and recapitalization, we find the sector valuation to be sufficiently discounted, but especially flag as attractive BNP, ISP, DBNor, Soc Gen, UCG and HSBC (1.9x P/NAV) based on a combination of attractive valuation, recent (in our view) ’unjustified’ market performance and resilienceto the stress test.

They can not and MUST NOT mark the devalued paper to reality as the Federal Reserve illegally purchased over $1000 billion of Fred/Fann. As such, if any real mark down happens then the Federal Reserve's massive fraud will have to appear on their balance sheets. This is why the US government is playing games with fred/Fann not being IMPLICITLY guaranteed by the full faith yet they keep saying the devalued paper is good and yet it MUST NEVER appear on the national debt.

It is accounting fraud pure and simple by the US government forced by the criminal treasonous private central bank US Federal Reserve.

JPM should be marked to bankruptcy. Hey JPM how's the 78 Trillion in derivatives treating you? Oh and since the US is so on the recovery track, would you kindly mark all your assets to reality, so that everyone can see just how damn useless and insolvent you are.

Just apply the formula: Take the number of Banks in the field, A. Multiply it by the probable rate of [Bank] failure, B. Multiply the result by the average out-of-court settlement to bond holders C. A x B x C=X, If X is less than the cost of a Bailout, we don't do one.

Why are UK bonds suggested at a 0% haircut? I thought a few weeks ago the big story was about how Greek debt was nothing compared to UK debt problems? And when will their all seeing eye of Horus shift its gaze to US debt which is basicaly not even calculable? I know I probably just made up a word, but so what? At least I dont have a couple quadrillion in debt!

Completely ridiculous. The whole point of a stress test should be to test for *all* possibilities including a sovereign default. Even if it's a 5-sigma event or whatever BS probability they may want to assign to it, wouldn't you want to see what the consequences would be if it did happen? It would be like analyzing a levee for Cat 4 hurricanes but not Cat 5 because Cat 5's are unlikely to occur. Oh, wait, isn't that what we did before Katrina.

I got a laugh this morning as I listened to CNBC while readying for work. Becky, Joe and Carl were talking about the "stress test" and Becky and Joe both agreed that regardless of whether it was a "real" test or just a marketing ploy, as long as it worked (meaning as a marketing ploy) it was good.

Even the artificial sugar is being accepted as "real" as long as the sweet tooth is satisfied.

BTW there was a quick shot of Carl rolling his eyes. I wonder if Carl was thinking about his very young twin girls and what kind of future is in store for them.